Difference Between Branch and Subsidiary

When contemplating expansion into a new location, companies often assess the operational and structural aspects of their prospective business entity. There are several strategies available to companies aiming to broaden their reach, such as Affiliates, Branches, Mergers & Acquisitions, Representative Offices, Subsidiaries, and even Professional Employer Organizations (PEO).

When venturing into a new market or extending into a different jurisdiction, businesses pay close attention to establishing either a branch or a subsidiary to ensure adherence to legal requirements.

In this article, we delve into the disparities between a branch and a subsidiary, alongside exploring contemporary international employment alternatives.

Key Takeaways

1. Branches and subsidiaries, although under the ownership of the parent company, exhibit notable distinctions.
2. A subsidiary serves as a gateway to penetrate unexplored markets or sectors.
3. Establishing a branch office allows businesses to cater to the customer's preference for face-to-face interaction without necessitating the creation of an entirely new entity.
4. When venturing into new territories, global employment solutions like Multiplier offer an alternative to establishing a corporate framework.

What is a Branch Office?

A supplementary location for conducting company operations, aside from the primary headquarters, is termed as a branch office. It empowers management with control over the expansion of business activities.

Employing a hub and spoke configuration stands out as the prevalent method for serving local clients. Administrative duties for multiple branch offices are centralized at a single home office, akin to the spokes of a wheel converging at a central hub.

Additionally, a branch office operates as a representative office, directly reporting to the main headquarters through an appointed branch manager. Typically, it undertakes similar tasks as the primary office. Furthermore, smaller administrative teams such as those handling marketing, accounting, and human resources may also be maintained.

Branch offices lack the autonomy of being standalone legal entities as they are wholly owned by the parent organizations. Consequently, the parent corporation bears full responsibility for all associated outcomes.

Example: The Reserve Bank of India, headquartered in Mumbai, Maharashtra, serves as the Central Bank of India. With 31 branches spread across the country, predominantly in key urban centers, it has extended its support and accessibility.

What is a Subsidiary?

A subsidiary company is typically owned and overseen by another corporation, often referred to as the parent company or a holding company.

The parent company holds a majority stake, owning 50% or more of the subsidiary's equity. Subsidiaries are commonly considered independent legal entities and may not engage in identical operations as the parent business. Importantly, liabilities are typically confined to the subsidiary alone.

In terms of governance and compliance, certain considerations come into play:

1. The subsidiary is permitted to establish its own procedures distinct from those of the parent company.
2. Independent record-keeping may be maintained by the subsidiary.
3. The management structure of a subsidiary is subject to local regulations.

Example: Time Warner serves as the parent corporation for multiple media entities, including Time Warner Cable, HBO, CNN News Group, Warner Bros., and Time Magazine and Entertainment Weekly.

Branch VS Company: Opening up a Branch Office or Forming a Subsidiary

When contemplating the establishment of a branch or a legal entity, companies aiming for domestic and global expansion must carefully weigh their options. Depending on the nature of the business, there are various advantages and disadvantages associated with setting up either a branch or a subsidiary.

The subsequent section delves into the significant differentiation between branch offices and subsidiaries.

Ownership Stakes

The principal contrast between a branch and a subsidiary lies in the proportion of ownership share. A branch maintains a 100% ownership interest in its parent company. Conversely, a subsidiary is owned by more than 50% of its parent company. A subsidiary is termed as wholly-owned when it is 100% owned.

Business Operations

While subsidiaries and branches may exhibit some structural similarities, they maintain distinct corporate structures. Both the main office and a branch carry out similar tasks, albeit in different locations, serving as extensions of the parent firm. In contrast, subsidiaries are not obligated to engage in the same line of business as their parent or controlling company. They may undertake tasks akin to those of a parent or holding corporation, or they may pursue different activities altogether.

Reporting Hierarchy

Within a branch office, the parent company typically entrusts authority and instructions to the branch manager. Reporting directly to the main office, the branch manager oversees operational activities. Conversely, subsidiary companies are accountable to their parent or holding company.

Reason to Set up a Branch or Subsidiary

To enhance business outreach, streamline administration, and facilitate the distribution of goods and services to customers, branch offices were established. They comprise a central office and dispersed branches across different regions, all tasked with performing identical functions. Conversely, the primary objective behind establishing a subsidiary is to expand the company. Usually, profits generated by a subsidiary are reinvested in acquiring further businesses and assets.

Legal Status

In contrast to a branch entity, a subsidiary constitutes a separate legal entity. It typically operates independently based on its ownership structure. While the parent company bears responsibility if a branch encounters legal issues with clients, subsidiary corporations do not function under the same mechanism.

Utilizing Systems and Resources

A branch firm can leverage the procedures and assets of its parent company for its operations as it functions as an integrated entity. The branch may adopt the same slogans, logos, and procedures. Similarly, a subsidiary can undertake comparable actions, albeit by capitalizing on its identity as an independent entity to develop processes and operational resources.

Liability

Because of its legal status, a subsidiary bears responsibility for its own actions. Liabilities cannot be attributed to the parent or controlling company. It is tasked with maintaining its own financial records and accounts. In contrast, the branch shares responsibility with the parent corporation. Branch firms have the option of setting up joint accounts or maintaining separate accounts.

Status After Business Loss

Businesses often encounter both profits and setbacks. In the event of sustained losses, the parent company might opt to close down a branch office. Similarly, if a subsidiary faces operational losses, the parent company may decide to sell it to another business.

Advantages and Disadvantages of Branch Office

Businesses opt to establish branches instead of subsidiaries to manage various client-specific tasks. This administrative expansion aids in gaining a deeper understanding of local market needs and serving nearby clients more effectively. By launching a branch, parent companies can fulfill client requirements without the necessity of forming an entirely new entity.

This approach facilitates swift operational expansion and enhances the company's presence in the local market.

Moreover, opting for a branch over a subsidiary offers additional advantages to the parent firm, including:

1.) Enhanced Authority From the Parent Company: As the parent firm maintains 100% ownership of its branch, it retains the capability to supervise the day-to-day operations of its overseas branches.

2.) Cost-Effectiveness in Initiating a Branch Office: Without the necessity of meeting share capital prerequisites or complying with additional expenses, establishing branch offices incurs lesser costs.

3.) Global Recognition of Branch Offices: While subsidiaries may lack acknowledgment in certain jurisdictions, branch offices commonly receive recognition as they are not independent entities.

4.) Consistent Tax Advantages: Branch offices present a preferable option over subsidiaries concerning taxation, as most nations have ratified double tax treaties.

Opening a branch or establishing a legal entity such as a subsidiary presents various challenges and hurdles. Business growth often faces limitations due to company policies or the legal and labor law regulations of the target market. Let's outline the primary difficulties associated with setting up a branch in any foreign country.

5.) Constrained Commercial Opportunities:

• The actions of the parent company are significantly limited, making it even more challenging to explore potential business avenues with branch offices.
• This limitation primarily stems from the ownership structure, wherein the parent firm bears full responsibility for any debts, penalties, or settlements incurred by a branch office.
• Establishing a branch office exposes the parent company to additional risks associated with expanding into new markets and exploring innovative business segments.

6.) Immigration and Visa Issues:

• Unlike subsidiaries, which are local entities with greater authority to sponsor visas for foreign workers, branch offices face limitations in this regard.
• However, due to their status as non-independent entities, it becomes challenging to recruit local talent.
• This difficulty further extends to building international teams and facilitating the internal transfer of employees within the parent company.

7.) Business Credibility and Reliability:

• Owing to a blend of reliability and trust, businesses often prefer to engage with locally established entities within their jurisdiction.
• A branch office set up overseas isn't an independent entity and isn't accountable for any local obligations.
• In the event of a contractual dispute, dealing with a foreign company's branch entails additional risks, such as international litigation.
• This could dissuade local companies from extensively collaborating with a foreign company's branch office, potentially depriving the parent company of economic opportunities.

Advantages and Disadvantages of Subsidiary

If an organization possesses the resources and time to conduct a fresh market feasibility assessment, they have the option to establish subsidiaries instead of branch offices.

Multinational corporations often conduct direct market research through branch offices. Companies opt to establish overseas subsidiaries when they anticipate favorable outcomes. Establishing a subsidiary becomes relatively more cost-effective for the parent company as subsidiaries typically require 50% or more equity ownership.

One can explore the benefits of forming an LLC in Dubai or a public or private limited company in the UK, for instance. Many US-based businesses catering to the European market opt for Ireland due to compliance convenience. Additionally, to tap into the growing African market, many leverage the free trade zones in the UAE.

Effective disconnection between the subsidiary and the main business is achievable. This provides the parent company with the flexibility to venture into new markets without risk while still maintaining effective control over earnings and revenue.

Opting to establish a subsidiary rather than a branch office also ensures the parent company additional benefits such as:

1. Establishing a Market Presence: Forming a local legal entity enhances the perception of your brand among the public.
2. Protection Under Local Laws: Subsidiaries are entitled to the majority of business protection legislation applicable to local enterprises.
3. Investment Flexibility: The parent company can tailor investments according to the risks associated with the business niche or the new market location. Complete financial independence can be achieved through local market borrowing.

Opting for a subsidiary over a branch for international expansion might appear more appealing. However, it comes with the inherent risk of being a separate legal entity. Establishing a subsidiary in the chosen jurisdiction could prove challenging and costly.

The primary drawbacks of setting up a subsidiary are outlined in the section below:

1.) Inadequate Administrative Guidance:

• Although the parent company does not directly dictate decisions for the subsidiary, it may hold ultimate authority over the subsidiary owing to its ownership share and voting rights.
• The personnel of a subsidiary may not always be affiliated with the parent company. A significant financial loss and, consequently, a damaged reputation for the entire business group could result from the lack of control.
• There is often a lot of back-and-forth in daily operations since parent companies have the final say. Naturally, this leads to challenges in significant decision-making and operations.
• An illustrative example is the recently concluded lawsuit involving Goldman Sachs by the US Department of Justice. In response to actions taken by its Malaysian subsidiary, the company agreed to pay $2.9 billion in fines for violations of international corruption laws.

2.) Regulatory and Cultural Challenges in an International Context:

• When a subsidiary exclusively operates in another country, it may encounter obstacles in adapting to the local political, social, and legal environments.
• Sudden legal or financial changes in the foreign country where the subsidiary operates can pose financial challenges.
• This necessitates the parent company relinquishing a portion of the subsidiary's local ownership.
• The operational model of Starbucks Corporation in its coffee business serves as a prime example for better comprehension. While Starbucks Corporation has formed a 50:50 joint venture with Tata Consumer Products for the Indian market, it has established a subsidiary in Japan.

3.) High Initial and Closure Expenses:

• When a company requires real estate or costly machinery for operations, they often opt to establish a subsidiary. This can lead to complex legal issues concerning local ownership and subsidiary taxation.
• Unlike a branch office, exiting a subsidiary during periods of low profitability or income can raise intricate legal and financial concerns.
• The case of Ford Motors, an Indian company, serves as a prime example of this scenario. The US-based automaker is currently entangled in challenging and costly financial and legal disputes regarding a manufacturing sales agreement and employee compensation.

Freedom From Setting up Various Business Entities for Expansion

In the rivalry between branches and subsidiaries, a subsidiary seems to possess greater adaptability, emerging victorious notably in aspects surrounding:

1. A subsidiary can distribute or allot shares to investors, partners, or venture capitalists.
2. It bolsters the parent company by facilitating the raising of funds for local expansion.
3. A subsidiary has the opportunity to get listed on a stock exchange, a privilege not extended to a branch.

The challenge of identifying and recruiting local talent becomes evident when closely analyzing the disparities between a branch office and a subsidiary. Fortunately, innovative methods exist for companies to expand even without establishing a branch or subsidiary.

Suppose your business can manage all aspects of payroll, benefits, risk management, and compliance while recruiting individuals on your behalf in accordance with the law, thanks to a global Employer of Record (EOR) system. You retain full control over your supported personnel on a daily basis.

An EOR offers numerous benefits over a branch in comparison to a corporate legal entity, such as:

1. With proper compliance, establishing a foreign presence becomes relatively straightforward.
2. In the future, you retain the capacity to swiftly conclude company operations.
3. By assisting your internal teams in navigating diverse tax regulations and local laws, considerable time and effort are saved.

Conclusion

In contrast to branches, subsidiaries demonstrate greater advantages and adaptability. They offer parent companies increased flexibility and potential for growth through opportunities like stock market listings, share distribution, and local expansion. Despite challenges, subsidiaries excel in facilitating international corporate operations and expansion strategies.